Partner Logo
Home  > Saving: The Magic of Compound Interest
 Share  Print Version  Email

Saving: The Magic of Compound Interest

Provided by the International Finance Corporation


Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest.  In short, you make money from your money.  Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.  In fact, Albert Einstein once was purported to have stated,“The most powerful force in the universe is compound interest.”  The below three examples will illustrated the power of compound interest.

Example #1

By instilling the saving habit early in life, even the goal of becoming a millionaire by the age of sixty-five can be reached. By starting at the age of twenty and saving KES95 per month, you can end up with a million KES by the age of sixty-five, assuming a 10 percent return on the money (tax deferred). This is also assuming that none of the money will be withdrawn during the waiting period.

This goal also can be reached if you wait until you are older to start saving, but the amount you must contribute monthly increases dramatically the longer you wait. For example, if you wait until you are thirty years old, you will need to save KES263 a month. If you wait until you are forty years old, you will need to save KES754 a month, and if you wait until you are fifty years old, you will need to save KES2,413 a month.  The below chart also shows how you can reach the KES1 million goal by age 65 if you prefer to make a one-time investment, monthly investment or annual investment at various ages.

Age

One-time Investment

Monthly Investment

Annual Investment

20

KES13,719

KES95

KES1,391

25

KES22,095

KES158

KES2,259

30

KES35,584

KES263

KES3,690

35

KES57,309

KES442

KES6,079

40

KES92,296

KES754

KES10,168

45

KES148,644

KES1,317

KES17,460

50

KES239,392

KES2,413

KES31,474

55

KES385,543

KES4,882

KES62,745

60

KES620,921

KES12,914

KES163,797

Example #2

This table illustrates the value over time of KES1,000 invested annually (only KES84 a month):

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

KES5,526

KES12,578

KES21,579

KES33,066

6%

KES5,637

KES13,181

KES23,276

KES36,786

7%

KES5,751

KES13,816

KES25,129

KES40,995

8%

KES5,867

KES14,487

KES27,152

KES45,762

9%

KES5,985

KES15,193

KES29,361

KES51,160

10%

KES6,105

KES15,937

KES31,772

KES57,275

11%

KES6,228

KES16,722

KES34,405

KES64,203

12%

KES6,353

KES17,549

KES37,280

KES72,052

Example #3

Investing KES10,000 in a one-time lump sum also pays off:

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

KES12,763

KES16,289

KES20,789

KES26,533

6%

KES13,382

KES17,908

KES23,966

KES32,071

7%

KES14,026

KES19,672

KES27,590

KES38,697

8%

KES14,693

KES21,589

KES31,722

KES46,610

9%

KES15,386

KES23,674

KES36,425

KES56,044

10%

KES16,105

KES25,937

KES41,772

KES67,275

11%

KES16,851

KES28,394

KES47,772

KES80,623

12%

KES17,623

KES31,058

KES54,736

KES96,463

Copyright © 2000 - 2016, International Finance Corporation. All Rights Reserved.

 Share  Print Version  Email
Comments &Ratings (0)
If you are a human, do not fill in this field.
Click stars to rate.
   Comments are truncated at 1000 characters